There is nothing wrong with Government coming to the rescue of financial institutions where mismanagement has caused risk of failure in a way that jeopardizes the stability of the entire financial system. What is wrong, and is both a violation of public trust and a display of professional incompetence, is to contribute taxpayer money in a way that enriches management and the owners of these mismanaged companies rather than the taxpayers.

Additionally, it is also a violation of public trust when government officials deliberately manipulate markets on behalf of certain market participants at the expense of others. The recent market manipulation executed by the US Securities and Exchange Commission by banning short selling of financial stocks is all the more outrageous due to that fact that it was specifically designed to enrich the very individuals who mismanaged their companies into near bankruptcy, and who are the underlying root cause of the larger systemic financial crisis by manufacturing, distributing, and inventorying toxic debt.

It is now well known that these financial firms manufactured, distributed, and inventoried near-fraudulent debt (financial widgets) at 30:1 leverage. Investors do not want these widgets at the current offer price, and if the widgets were priced and offered at a realistic market clearing price, it would likely bankrupt the vendors.

Hank Paulson (in concert with Ben Bernanke and Christopher Cox) has just orchestrated a plan that provides huge sums of taxpayer money to his old colleagues and buddies at Goldman Sachs, along with various others, including Morgan Stanley, to purchase the unwanted widgets in a manner that directly enriches the management and shareholders of these nearly bankrupt companies. Rather than demanding that taxpayers be rewarded with any profits of the rescue, as just occurred with AIG, this latest proposal appears deliberately struck to stick taxpayers with the downside, while management, creditors and shareholders of these firms instantly reap tens of billions in stock and bond appreciation.

Such actions cross the line not only into the arena of professional incompetence and negligence, but steps right up to the line where an open society stares official tyranny in the face.

These government officials could have rescued the financial system in a way aligned with their core responsibilities to the American taxpayer. If they had done so, as they did with AIG, they would deserve a pat on the back. They chose a different path. Rather than rescue the financial system in a responsible way, they have rescued their rich buddies that created the mess and left the taxpayer holding the bag. The American people deserve better.

Additionally, the same Gang of Three government officials simultaneously executed a massive market manipulation specifically designed to further enrich their Wall Street cronies — the very same individuals who mismanaged and nearly bankrupted these firms — by banning the short selling of financial stocks.

The management of these mismanaged companies — including John Mack, of Morgan Stanley, Richard Fuld, of Lehman Bros, and before them senior executives of Bear Stearns — have loudly spread rumors that the decline in their stock was caused by rumor-mongering and improper short-selling without offering an iota of evidence. Zero evidence has been presented to back up these allegations.

The market manipulation executed by Cox last week occurred without offering a single shred of evidence of the alleged improprieties. This behavior is eerily similar to the allegations of WMD in Iraq made by others in the Bush administration while absent of evidence. The administration at least went to the trouble of manufacturing evidence to support its claims that Iraq had weapons of mass destruction.

Worse, was their professional incompetence in responding to the impending Lehman and AIG bankruptcies over the weekend of Sep. 13-14, and on Monday, Sep. 15. Their behavior and public announcements greatly intensified the crisis, and seriously elevated the systemic risk in global financial markets.

Some background on this issue is helpful. Financial professionals have always feared the “domino effect” of the failure of one large financial firm taking down many others through counterparty exposures. Since the failure of Bear Stearns and Northern Rock, market participants have had the clear impression that Government officials in the US and UK were not going to let this happen.

On Sept 13-15, the Gang of Three sent dramatically different signals into the market. Their abandonment of Lehman and AIG had dramatic negative consequences. At a press conference on Sep. 15, Paulson clearly said, in paraphrase, that “while the Government is concerned about the health and stability of the markets, it would not act to save these firms.”

This news changed the landscape. Now, the domino effect not only seemed possible, it appeared imminent and all eyes were on the insurance giant AIG. Global stock markets reacted instantly, and rationally, as investors fled financial stocks generally, and the stocks of riskier financial firms (like Morgan Stanley and Goldman Sachs) in particular.

Rather than pouring water on the fire, Paulson pumped gasoline in a move that will now cost the US taxpayer several hundred billion dollars more than if proper actions had been taken in a timely fashion. Yet, after the dramatic global selloff, the AIG fire was doused in government water, but the global fire had become an inferno.

Rather than admitting to this blunder and learning from it, those who committed the blunder are now attempting to divert blame and attention to short sellers. Credit should be given where credit is due. The SEC is now complicit in falsely pointing the blame for the near-demise of these financial institutions at short sellers (a convenient scapegoat) in what appears to be a blatant attempt to divert attention from:

1. The real cause of the demise of these firms: mismanagement, in applying 30:1 leverage to volatile illiquid mortgage assets that these firms manufactured, distributed, and inventoried;

2. The failure of regulatory oversight, in allowing these firms to use 30:1 leverage on collateral known to occasionally suffer 30% to 50% downside fluctuations (real estate);

3. The failure to respond properly to the fires at Lehman and AIG; and

4. The real reason for the SEC market manipulation: to artificially inflate the share prices of distressed companies in a way that enriches management and shareholders, and simultaneously strengthens the company balance sheet (the new riches coming at the direct expense of innocent market participants, at the direct expense their financial competitors who were prudent in avoiding overexposure to leveraged toxic debt, and at the expense of free market principles).

Absent evidence of wrong-doing, the SEC is complicit in spreading lies and rumors, and engaging in market manipulation on behalf of their wealthy buddies. To date, rather than asking pointed questions, the press has bought the story and is guilty of rebroadcasting it rather than questioning its validity. With no evidence of improper short selling the most rational explanation for stock price declines is that natural investors (from mutual funds, pension funds, retail investors, etc) were selling or hedging long positions due to lack of confidence in these firms, and due to the new risks that sprang into existence by the reversal of position taken by US regulators.

While the SEC says that it is opposed to market manipulation, it has just engaged in market manipulation of the highest order on behalf of John Mack at Morgan Stanley and the gang at Goldman Sachs. This market manipulation has instantly resulted in the management and owners of these two firms receiving tens of billions of upside stock profits (and hundreds of billions among the 799 financial stocks) in just two days.

The SEC should be held accountable to defend its WMD claim with evidence that was in its possession at the time it manipulated these markets. It should not be allowed to manufacture an after-the-fact witch-hunt. Key questions are: What evidence was in the hands of the SEC regarding both mismanagement and short-selling at the time that this market manipulation occurred? Also: Were government officials at the SEC, Treasury and/or the Federal Reserve (specifically Cox, Paulson, and Bernanke) speaking with market participants who would be enriched by the market manipulation just prior to the manipulation? If so, what was the nature of these communications?

When small businesses take risks that don’t work out, they fail. Farmers, bakers and widget-makers are not enriched by government for their failure.

Goldman Sachs is known as one of the most opportunistic and predatory firms on the street. When Goldman identifies companies in distress it has a long history of rushing in and providing assets in return for majority equity stakes, rightly earning the upside for this risk ahead of the existing management or owners. Hank Paulson was the direct recipient of this behavior while CEO at Goldman and it is important to note that he was able to sell more than $500 million in Goldman stock, tax-free, when he accepted the job as Secretary of the Treasury. Now that Goldman is in distress (and Paulson is employed by US taxpayers), Paulson wants to hand Goldman taxpayer money without demanding a controlling equity stake from Goldman Sachs in return. Who does Paulson work for? This is not rocket science.

No private company or public company would stand for similar behavior of their directors risking shareholder assets in ways that deliberately benefited others at shareholder expense. Such behavior would be rewarded with immediate dismissal for dereliction of duty and personal lawsuits seeking damages for negligent behavior.

Rather than getting an honest explanation about what has just occurred, the American people are now being sold a story manufactured by government officials who have been complicit in this irresponsible behavior. The open question remains: Are the American people gullible enough to buy it?

Sept. 14 (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said the financial crisis that began with the collapse of the subprime-mortgage market last year "is probably a once in a century event'' that will lead to the failure of more firms.

"There's no question that this is in the process of outstripping anything I've seen, and it is still not resolved,'' Greenspan said in an interview today on ABC's "This Week with George Stephanopoulos.'' Greenspan, 82, retired from the Fed in January 2006 after serving for 18 years as chairman.

Treasury and Federal Reserve officials are working on a sale of Lehman Brothers Holdings Inc., the 158-year-old investment bank that reported a third-quarter loss of $3.9 billion. U.S. Treasury Secretary Henry Paulson, who spearheaded a government takeover of mortgage giants Fannie Mae and Freddie Mac last weekend, has said he's reluctant to use Federal funds to rescue Lehman.

"What they are trying to do with Lehman is find a way in which there is no government money involved in this particular set of negotiations,'' Greenspan said. "If they can't, they have to make a very key decision as to whether they allow it to liquidate or support it,'' he said, adding that he doesn't know enough details to recommend the right move.

In March, the Federal Reserve took on a $29 billion portfolio of mortgage-backed debt and other assets when it brokered the sale of Bear Stearns Cos. to JPMorgan Chase & Co. It also opened up cash loans to investment banks, a safety net unavailable to Bear Stearns.

Fundamental' Institutions

"There are certain types of institutions which are so fundamental to the functioning of the movement of savings into real investments in an economy that on very rare occasions, and this is one of them, it's desirable to prevent them from liquidating in a sharply disruptive manner,'' Greenspan said.

Asked whether government bailouts should be used to help the auto industry, Greenspan said that would undermine savings and growth of the economy, leading to stagnation.

Shares of American International Group Inc., the largest U.S. insurer, have plunged 46 percent over the past week on concern that the company may be the next big U.S. financial firm after Lehman to fall short of capital.

The federal government took over Fannie Mae and Freddie Mac, the two largest sources of money for U.S. home loans, on Sept. 7, placing them under conservatorship and establishing procedures for buying their senior preferred stock if liabilities exceed assets.

Winners and Losers

"This is a once in a half century, probably once in a century type of event,'' Greenspan said. "We shouldn't try to protect every single institution. The ordinary cost of financial change has winners and losers.''

Greenspan, since retiring, has returned to his role as a private economic forecaster, speaking at conferences and to groups of bankers and investors, while consulting for clients such as Deutsche Bank AG.

His memoir, "The Age of Turbulence,'' was released in a paperback version this month, a year after the first hardcover edition. In a new epilogue, the former Fed chief cited a "critical need'' to create procedures for bank bailouts that ensure there is no impact on the Fed's balance sheet and interest-rate policy. He also calls for the creation of an organization similar to the Resolution Trust Corp., the agency created in 1989 to dispose of the assets of insolvent savings and loans banks.

Earlier this week, Greenspan told Bloomberg Television that the loss of investor confidence in Lehman would best be resolved by Wall Street firms acting without federal financial aid. The former Fed chairman also said he's ``fearful'' the federal takeover of Fannie Mae and Freddie Mac may be "extraordinarily expensive.''